Chinese Investors Anticipate Consumption to Fuel 2023 Stock Market Rally

Chinese stocks have been on a tear in the first week of 2023, and investors are expecting more gains with consumer-related stocks leading the surge.

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Optimism is growing among traders on the mainland as the reopening trade picks up speed. The rapid decline in infections in some cities has caught many money managers by surprise, leading to bets that pent-up demand will help revive growth and corporate profits.
"Consumption is likely to be a key driver of economic recovery from the Covid-19 pandemic, as pent-up demand is released and confidence and employment improve," said Shi Peng, managing director at Loyal Capital Ltd. in Tianjin.

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This week, China's mainland stock benchmark climbed by almost 3%. This is higher than the global gauge. Traders are doing this in preparation for a resumption in economic activity. Additionally, easing regulatory risks and support measures for the property sector have given a boost. A measure of US-listed Chinese shares had its best start to a year after a relentless rout that erased more than half of its value over the last 24 months.

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This week, the CSI 300 Consumer Discretionary Index outperformed the benchmark, climbing 3.9%. Some of the biggest gainers were retail-related names such as auto parts producer Huizhou Desay Sv Automotive Co. and appliance maker Beijing Roborock Technology Co.

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"Consumption is the last resort now for the economy, and the market is likely to favor the theme as the low-base effect means that the numbers will look solid," said Yu Yingbo, investment director at Shenzhen Qianhai United Fortune Fund Management Co. "The reopening story will be lasting, and can be played throughout the year."

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The CSI 300 Index has surged more than 13% since the end of October, after a surge in infections emptied streets and shuttered stores. A gauge of Chinese stocks listed in Hong Kong has fared even better, rallying 45% in the period as authorities stepped up support for the beleaguered property sector. Although both measures have recovered somewhat from their lows in 2020, they are still more than 30% below their 2021 peaks. According to a note from Bank of America, 90 out of 101 cities in a sample have seen continuous improvement in intra-city mobility, up from 49 a week ago. This is a positive trend that indicates that cities are becoming more accessible and easier to get around.

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Huaan Securities analysts believe that the spread of Covid-19 has likely peaked ahead of schedule. They are expecting a strong recovery in consumption of services during the spring festival. Consumer stocks are expected to lead the gains before growth shares take over. This is based on expectations that policy announcements will be made at two government meetings in March.

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There are still several risks to consider: more waves of Covid could occur, the number of severe cases is still high, and deaths are continuing to mount. Some warn that any further market rally may be punctuated by periods of volatility.

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Wang Huan, managing director at Shanghai Zige Investment Management Co., believes that the market has not yet fully priced in the fact that China has pulled through the first wave of the pandemic. However, he does not believe that the market will continue to rise steadily, but rather that there will be cycles of optimism and pessimism.
As sentiment improves, trading activity has also increased. Daily average turnover in Shanghai and Shenzhen rose to over 800 billion yuan ($117 billion) this week, although it is still below the level seen in early December.

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According to Morgan Stanley strategists, there are several signs that the Chinese economy is beginning to recover from the Covid-19 pandemic. These include committed stimulus policy, further currency strengthening, and near-term stabilization of geopolitical uncertainty. The strategists believe that these factors warrant a greater allocation into China, and they reiterate their overweight stance on China in a note dated Jan. 5.